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Macroeconomic policy dilemma in Nigeria

Paradoxically, Nigeria is also experiencing “subtle and not so subtle” reduction in economic activities,

Based on the recently released data by the National Bureau of statistics (NBS) inflation rate in Nigeria is presently 17.75 percent. To tame the problem of inflation, policy makers can simply embark on the implementation of contractionary monetary and fiscal policy. This entails reducing the amount of money in circulation, by increasing interest rate and other strategies (monetary measure) and reducing government expenditure (fiscal measures).

All things being equal, these measures would reduce the inflationary headwinds and restore price stability.

Paradoxically, Nigeria is also experiencing “subtle and not so subtle” reduction in economic activities, largely caused by COVID-19. Gladly, economic activities are improving steadily as shown by 0.5 per cent increase of GDP in Q1 2021, and further impressive GDP growth of five per cent in Q2 2021.

To sustain this tempo, policy makers are expected to intensify expansionary monetary and fiscal strategies. On the monetary policy part, we expect that the CBN would continue to implement Quantitative Easing, pressure banks to increase their loan portfolio and maintain moderate interest.

On the fiscal part – the 2021 budget, Medium Term Expenditure Framework (MTEF) and Fiscal Strategy Paper (PSP) clearly indicate that the federal and state governments would likely continue to implement expansionary fiscal strategies. Indeed, all tiers of government are implementing Deficit Budget  – which is a major sign of expansionary fiscal policy. As such, we expect the borrowings of all tiers of government to keep rising, at least, for the next three years.

However, expansionary monetary and fiscal measures would definitely aggravate inflation, unless this also translates to an increase in the aggregate level of productivity across all macroeconomic value chains (manufacturing, services, real estate etc).

Where there is no existing surplus of factors of production, like in the case of Nigeria, it may take medium to long term frame to increase aggregate level of productivity. Therefore, Nigeria may have to live with the present inflationary pressure in the interim. This is a fact.

These are our current dilemmas.  Should the country adopt contractionary macroeconomic measures which would shrink the economic activities, or adopt expansionary measures, with attendant increase in inflationary pressures? Our inflationary pressures are largely aggravated by increase in cost of input and low level of productivity. As such, production needs to increase. This would lead to economy of scale, hence reduction in general price level. Consequently, the purchasing power of Nigerians would also improve gradually.

I will gladly choose the expansionary measures. But “cautious” expansionary measures. Cautious in the sense that the fiscal spending should be aimed at deliberately improving the aggregate supply/productivity – e.g increase in spending towards enhancing economic infrastructure, such as railways, ports, strategic roads, airports, dams, mechanised agriculture, bolstering existing small businesses etc.

In addition, the monetary measures should be aimed at risk-based expansion of loans to the real sector of the economy, manufacturing, real estate, heavy industries etc.

This way, we will be able to balance inflation and economic growth.


Abdulkadir Sulaiman can be reached through [email protected]

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